The DIP lenders contend that the Debtors’ Plan contravenes the clear agreement between the DIP lenders and the Debtors that the Debtors’ assets would be sold through a section 363 asset sale and not a a plan of reorganization. The DIP lenders further contend that the Debtors have fabricated a pretext for pushing a plan of reorganization, that pretext being that it is under a plan that administrative and priority claims are most assuredly paid out in cash. The DIP lenders argue that this is certainly not the case in respect of their own planned credit bid for the Debtors assets; that they have agreed to pay such claims in cash in the event that their bid is a winning one. Having satisfied concerns as to these claims (including a commitment to pay up to $16.3mn for professional fees relating to the bankruptcy), the DIP lenders argue that the Debtors’ continued insistence on pursuing a plan of reorganization must stem from some other motives. The DIP lenders smell a rat, an “ulterior motive” to assure that certain Debtor insiders get releases in respect of ongoing investigations into insider misconduct, releases that are par for the course in a plan of reorganization but not in a section 363 assets sale.

The objection states, “The DIP Lenders loaned the Debtors approximately $92.5 million in January 2018. Ten months later, when no other viable funding options existed to fund the Debtors’ operations and provide the Debtors with the runway necessary to prosecute the chapter 11…the DIP Lenders loaned the Debtors another $54.5 million. Suffice it to say, the DIP Lenders have been, and continue to be, the Debtors’ lifeline.

During prepetition negotiations, one of the primary points of contention among the Debtors and DIP Lenders concerned whether the sale of the Debtors’ assets would be consummated pursuant to a plan of reorganization or a sale order pursuant to Bankruptcy Code section 363 (a ‘Sale Order’). The DIP Lenders refused to commit to consummating the sale through a plan but agreed that the Debtors could run a plan process in parallel with the sale process so that only if the sale process were to yield a third party buyer willing to close through a plan and pay cash consideration sufficient to allow the Debtors to pay the DIP Facility in full in cash, and pay all administrative and priority claims in full in cash, the Debtors would be able to seek confirmation a chapter 11 plan.

Initially, the DIP Lenders understood that the Debtors’ insistence on a plan process stemmed from a desire to ensure payment of administrative and priority claims in the chapter 11 cases. However, during postpetition negotiations with respect to a potential stalking horse asset purchase agreement, it became clear that payment of administrative and priority claims was not the Debtors’ motivating factor because the DIP Lenders took this issue off of the table by agreeing that they would provide sufficient cash consideration to pay the full amount of the Debtors’ estimates of such claims. Indeed, following extensive negotiations with respect to the Stalking Horse APA, and in an effort to achieve a consensual hearing on approval of the Bidding Procedures, the DIP Lenders revised their bid to provide for the payment of 100% of the estimated amounts of the Debtors’ administrative and priority claims to the extent they are the Successful Bidder at the Auction. Specifically, the DIP Lenders agreed to provide up to $38 million for the payment of administrative and priority claims, consisting of the Debtors’ estimates of $16.3 million for the Estate Retained Professional Fees Escrow Amount, $15 million for the Payroll Escrow Amount, and $6.7 million for the Wind-Down Escrow Amount.

The Debtors’ confounding refusal to accept this offer-namely that the Sale could close outside of a plan and pursuant to a Sale Order with the DIP Lenders providing cash to meet Debtors’ estimated administrative and priority claims-now makes it clear that the Debtors’ determination to pursue a plan process is being driven by an ulterior motive: assuring that certain insiders of the Debtors receive releases under a chapter 11 plan. As the Court is aware, the Committee is currently in the midst of a comprehensive investigation into the prepetition conduct of the Debtors’ insiders, to whom such releases would be extremely valuable. By requiring a winning bidder to wait until plan confirmation to obtain the assets, the Debtors could hold such assets hostage until the winning bidder (or the DIP Lenders) agrees to break whatever deadlock may then arise between the Committee and the Debtors regarding the potential causes of action subject to the release; in other words, the Debtors could use the promise of the assets to force the winning bidder (or the DIP Lenders) to pay for the release of the Debtors’ insiders, over the objection of the Committee.”

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